Intel Numbers Raise A Question About the Netbook

Buried inside Intel’s blowout numbers for the first quarter was a statistic that raised a question about one of the most talked-about tech products of the last three years. Could the netbook be running out of steam?

The answer may not be simple. While Intel argues that netbooks are doing just fine, it’s possible that they could make even more money if they are wrong.

To understand that paradox, recall a few attributes about this new computer category. These are small notebooks, typically priced at $350 or less, which are typically powered by a low-end Intel chip called Atom. Heavily promoted by PC makers like Asustek and Acer–and egged on by Intel–netbooks were a hot item even as the recession was at its peak.

Intel in January said revenue from revenue from sales of Atoms and the associated chips it sells to build a netbook rose 167% in 2009. But conditions seemed a bit cooler in the fourth period; revenue from Atom and its accessories rose 6% from the third period ending in September, a bit below the 10% sequential growth rate for chips sold for all PCs.

In the first quarter, the divergence was more striking; Intel said Tuesday that Atom-related revenue was off 19% from the fourth quarter, where sales of all PC chips were flat.

Analysts were quick to ask Intel during the conference call Tuesday whether the netbook phenomenon was slowing down. Not to worry, suggested Paul Otellini, Intel’s chief executive. “If you look in terms of the total year last year and our view for the total year this year, we really don’t see a change,” he said.

How is that? Keep in mind that Intel’s numbers really reflect sales to PC makers, not to end users (though that’s where its technology ends up). Otellini noted that in the fourth quarter there were lots of companies coming into the market for netbooks for the first time, requiring them to order chips. So results for the first quarter, which tends to be seasonally weak anyway, also were facing a comparison against a somewhat inflated fourth quarter of sales for Atom, his remarks suggest.

Another analyst asked what Intel could do to boost sales of netbooks, such as cut prices on Atom. Otellini, instead, suggested there were technological advances to make netbooks more attractive. He disclosed that Intel in the second quarter will begin shippping a dual-processor Atom for those portable machines that could help netbook sales in the holiday season of 2010. (So far, while desktop versions of Atom have had two electronic brains, those for netbooks have only had one). “There will still be significant growth in the netbook business year-over-year,” Otellini said.

Oddly enough, however, the disclosures about seemingly low Atom sales were not exactly seem as a blow to Intel on Wall Street. “It’s a positive,” said Tim Luke, an analyst at Barclay’s Capital.

Remember that the netbook has always been controversial in the financial community, with some analysts predicting the devices would steal sales from more expensive laptops. Atoms are carried on Intel’s price list at a range of $29 to $75, considerably less than more-profitable Intel chips for laptops; its mainstream Core line, for example, lists from $113 to $562.

Intel has always disputed this argument, seeing netbooks as a new market for an additional machine that does not take the place of a full-featured PC. But to the extent that consumers do opt for mainstream laptops rather than netbooks, the company does make more money.

Another factor in the netbook conundrum is all the publicity over tablet computers, prompted by Apple’s iPad. In theory, some consumers could decide to gravitate to that category rather than netbooks–raising another issue for Intel, since the iPad uses an Apple-designed chip based on a design from ARM Holdings.

Otellini suggested analysts not worry too much about this trend either, predicting that many companies would introduce Atom-based PCs around the time of the Computex trade show in Taiwan in early June. “I view tablets much like I viewed netbooks two years ago, which is that was a new category then that was market expansive,” he said.